We have downgraded our long-term recommendation on
Navistar International Corporation
) to "Underperform". The leading truck producer faces difficulty in
obtaining smooth supply of materials due to over dependence on a
few suppliers. Besides, strict regulation by the government will
create pressure on the company, as it generates most of its
revenues from services rendered to the government. The company also
contends with rising research and development expenses.
Navistar continues to invest in research, development and
tooling equipment to design engine products which will meet
the Environmental Protection Agency (EPA) and the California Air
Resources Board (CARB) emission standards. But the company is
incurring substantial expenses to conform to the government
regulation on engine emission, noise and safety.
Although the revenues derived from the U.S. government has been
progressively declining over the years from 25% in 2009 to 15% in
2010 and 13% in 2011; the company still generates a significant
amount of revenues from this source. Besides, Navistar is likely to
face a tremendous financial pressure if the government contracts
are terminated, rendering renewal of contracts in future extremely
Navistar is supplied with materials and manufactured components
by third party suppliers. Some of them are the only suppliers of a
particular supply item. Any disruption in supply can hinder the
productivity as well as the profitability of the company.
The company, however, is making investments in different joint
ventures. This will eventually lead to growth opportunities along
with expansion in markets. Further business acquisitions will also
have a favorable impact on the company.
Navistar has also recorded an improvement in the debt position.
Long-term debt was $4.50 billion as of April 30, 2012, compared
with $4.86 billion as of October 31, 2011.
The company reported a loss of $137 million or $1.99 per share
(excluding special items) in the second quarter of fiscal 2012, in
sharp contrast to a profit of $102 million or $1.30 per share
recorded in the corresponding quarter last year. The results missed
the Zacks Consensus Estimate.
Revenues went down 2.9% year-over-year to $3.3 billion, also
falling behind the Zacks Consensus Estimate. The decline was
attributable to a decrease in sales in Engine and Part segments,
which was partially offset by higher sales in the Truck
Warrenville, Illinois-based Navistar International Corporation
manufactures and sells commercial trucks, mid-range diesel engines,
buses, military vehicles and chassis for motor homes and step-vans.
It also provides service parts for various trucks and trailer.The
company is one of the largest truck producers along with
Our long-term recommendation is backed by a Zacks #5 Rank, which
translates into a short-term (1 to 3 months) "Strong Sell"
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